Could rein in inflation as domestic prices may be capped

Harish Damodaran

Cost scale


Flour millers

in the South are paying Rs 10,200-10,600 a tonne.

Landed cost

of imported wheat could be roughly Rs 10,600.

This will

ensure that domestic prices stay within Rs 11,000 a tonne.

New Delhi, June 29

The Union Government's decision to slash Customs duty on wheat from 50 per cent to five per cent is unlikely to trigger large-scale imports by private parties.

What it would result is in putting a lid on domestic prices, which fits in with the Government's objective of reining in inflation.

What mills in south pay

Currently, flour millers in the South are paying Rs 10,200-10,600 a tonne for the standard milling or `dara' wheat procured from Delhi and Uttar Pradesh (mainly Etah).

Against this, the State Trading Corporation of India (STC) on Wednesday finalised a wheat import tender at an average price of $198 a tonne, cost & freight (c&f). The private trade, given its less bureaucratic structure and procedural bottlenecks, would probably be able to contract at about $5 lower.

Even at a landed price of $190 a tonne, the imported wheat, after factoring in the five per cent duty, would cost around Rs 9,200.

Actual import costs

To this, if one adds clearing and bagging expenses at the port (about Rs 800) and internal freight cost to the mill (another Rs 600), the ex-mill rate of imported wheat would be roughly Rs 10,600.

"The five per cent duty works out to almost Rs 450 a tonne, which is what makes imported wheat marginally more expensive. It is a clever move from the Government's side," said Mr Atul Chaturvedi, President (Agro), Adani Exports Ltd.

In fact, the original proposal was to allow duty-free imports by the private trade, as was done for the STC, which is importing 35 lakh tonnes on behalf of the Government.

But with the Finance Ministry eventually opting for five per cent rate, imported wheat would cost more than local wheat.

At the same time, it ensures that domestic prices stay within Rs 11,000 a tonne.

When import could happen

The moment prices cross that level, imports would happen. Thus, it is not "actual" imports as much as the "threat" of imports that will keep prices under check.

Earlier, there was talk of wheat prices in the South reaching Rs 13,000 by December. "The Government has seemingly killed many birds with one stone," Mr Chaturvedi added.

The concessional five per cent duty is applicable only till December 31.

The Centre's announcement of allowing imports by the private trade at five per cent Customs duty resulted in wheat prices rising on Thursday.

Wheat dara increased by Rs 10 a quintal to Rs 852-54 in New Delhi. In Hapur, it was up Rs 5 at Rs 842.50.

FUTURES RISE

Prices in the futures market also witnessed a rise of Rs 3 a quintal for near-term contracts and Rs 6 for December contracts on NCDEX. On MCX, while near-term contracts gained, October contracts were flat.

Wheat for July delivery was up at Rs 833 a quintal on NCDEX, while on MCX it was up at Rs 841. Similarly, August contracts were up at Rs 852 and Rs 861 respectively.

While October contracts on MCX were flat Rs 895, December contracts on NCDEX were up at Rs 917.

Open interest for August delivery on NCDEX increased to 1,07,800 from 1,07,010, while for December, it slid to 98,340 from 99,760.

(This article was published in the Business Line print edition dated June 30, 2006)
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